Deals in the health and life sciences sector will likely accelerate in 2024 as large-cap biopharma firms continue to seek potential targets. However, a more stringent economic, geopolitical and fiscal environment will require higher internal rates of return on investments.
Biopharma and healthcare firms find themselves at a critical juncture, amidst challenges and opportunities. Looming patent cliffs in the latter half of the decade amplify the urgency for growth. Embracing inorganic growth becomes paramount, with mergers and acquisitions providing a strategic avenue to secure market share, optimize operational costs through economies of scale, and accelerate innovative drug development. The primary emphasis among firms lies in generating post-deal value. Additionally, fostering partnerships and investing in AI and data analytics are pivotal drivers for synergies and cost-effective healthcare delivery. These refined approaches are steering firms towards innovation and sustained growth beyond 2024.
Large deals
In 2023, healthcare M&A deal volumes experienced a notable 40% deceleration, primarily attributed to heightened financing costs. Although, resilience appeared in biopharma M&A activity, through innovations in GLP-1 and ADCs drugs and became large growth drivers of Novo-Nordisk, Eli Lilly and Abbvie. GLP-1 drugs, designed to emulate a hormone released from the brain to curb appetite, currently involve injections. However, biotech firms like Kallyope are advancing oral alternatives in mid-stage clinical trials. Table 1 underscores the high desirability of targets with robust early/mid-stage ADC drugs in their pipeline, as evidenced by a willingness to pay nearly double the market capitalization, given the favourable risk-to-reward profile stemming from demographic changes. Oncology continues to be a focal point, capturing 18% of deals. The robustness of deal values finds additional buoyancy through substantial M&A transactions in both the biopharma and healthcare domains. Notably, biopharmas are strategically divesting non-core assets to generate capital for new acquisitions, further amplifying the dynamism of the market landscape.
Table 1: Largest healthcare and biopharma deals in 2023.
Deal | Value | Details |
Pfizer acquires Seagen | $43 billion, 33% premium | Seagen manufacturer and marketer of ADC products and technologies; Pfizer uses cash windfall from the COVID-19 pandemic. |
Daiichi Sankyo and Merck & Co. partnership | $22 billion potential | ADC products for lung cancer and ovarian cancer, Merck pays $5.5bn to Daiichi for development. |
Bristol Myers Squibb acquired Karuna Therapeutics | $14 billion, 53% premium | Karuna develops medicines for psychiatric conditions, leading with the product for schizophrenia, and also has a promising pipeline. |
Merck & Co. acquired Prometheus Biosciences | $11 billion, 81% premium | Prometheus in phase III for drug for ulcerative colitis, Crohn’s disease and other autoimmune conditions; increase pipeline diversity for Merck. |
CVS Health acquired Oak Street Health | $11 billion, 34% premium | Oak Street Health operates 169 doctor-run clinics, broadening CVS' primary care outcomes. |
AbbVie acquired ImmunoGen | $10 billion, 95% premium | ImmunoGen ADC Elahere for ovarian cancer and pipeline ADC candidates. |
A significant merger also unfolded between private care providers Kaiser and Geisinger Health Systems, culminating in a non-profit entity Risant Health. Risant's vision includes the incorporation of at least four additional integrated health systems into the consortium. The merger is anticipated to yield combined annual revenues exceeding $50 billion. Furthermore, recent industry insights indicate a prevailing sentiment among healthcare executives, with 68% forecasting an elevation in M&A activity volumes throughout 2024. Nevertheless, it becomes apparent that the imperative for larger-value deals persists into 2024, substantiating the need for sustained year-on-year gains.
Economic pressure points
The impact of inflation on the healthcare sector has been pronounced; higher nominal wage growth has contributed to higher labour costs and lower profit margins. Furthermore, increases in the cost of capital have meant higher internal rates of return on projects are required to guarantee post-deal value in private and public markets. Lastly, supply chain issues have affected the delivery of medical equipment. Nonetheless, with disinflation taking hold and corporate balance sheets remaining healthy, recession concerns from higher interest rates will subside if robust productivity growth in the US persists. While challenges stemming from elevated costs may linger, the early monetary easing by central banks in developed markets will lift stock prices. This may render initial public offerings (IPOs) more appealing, contingent upon expected valuations.
The healthcare industry is inherently service or research-oriented so exhibits some resilience to geopolitical tensions. The predominantly onshore location of drug manufacturing plants further fortifies the sector against external shocks. However, as global political landscapes undergo potential shifts due to upcoming general elections in regions such as the US, Mexico, India, the UK, and the European Parliament, the prospect of consequential alterations to the regulatory environment looms large. Despite a notable surge in smaller-value deals within fragmented sectors without stringent oversight, larger biopharmaceutical entities may find themselves subject to diminished regulatory scrutiny. Nevertheless, litigation remains a persistent concern. Additionally, an escalation in the intensity of anti-trust and legal challenges further complicates the operational landscape for healthcare and biotech enterprises.
The Inflation Reduction Act (IRA) impacted profit margins and future earnings of global pharmaceutical companies in a bid to address healthcare inequality in the US. Given the significance of the US market for healthcare firms, even European and Asian manufacturers are affected by these legal changes. Under the IRA, pharmaceutical companies must now negotiate drug prices with health insurance providers. Those on Medicare means the federal government must negotiate prices for currently the ten most expensive drugs post-patent exclusivity. As patents expire (small-molecule drugs are protected for nine years and biopharmaceuticals have thirteen years), the number of drugs subject to negotiation is to reach 80 by 2030. The IRA also imposes constraints on price uprating through rebates, tying drug prices to inflation rates. This poses challenges for companies with cost bases exceeding inflation, emphasizing the importance of bringing patent-protected, high-value drugs to market. While this provides a temporary buffer for existing patents, a significant impact is anticipated in the 2030s as newly developed drugs fall under IRA regulations. Thus, the IRA is prompting pharmaceutical firms to reassess pricing strategies and adapt to a more regulated market environment. Overall, increased regulatory oversight and legislation around the sale of drugs will reduce opportunities for M&A activities. Lower profit margins will lower the forecast of future earnings; one effect may be a reduced ability to finance transactions with debt.
AI will prevail beyond 2024
The integration of large language models (LLMs) and generative AI is poised to integrate into the healthcare sector; it will likely hasten biomedical research and the development of pharmaceuticals and equipment, while concurrently enhancing clinical outcomes and patient experiences. In the former, this integration will catalyze innovation, for example, by predictive modelling of protein structures and exploration of alternative applications for existing drugs. Moreover, strategic partnerships have emerged between major drug and equipment developers and technology enterprises which are aimed at cultivating proprietary LLMs or building access to generative AI. In Europe, Sanofi injected $270 million into biotech firm Owkin to develop prognostic models to predict patient outcomes of cancer drugs. Operationally, AI holds the potential to mitigate administrative and labour costs, thus optimizing the utilization of medical professionals' time and boosting efficiency. AI-driven data analytics will prove pivotal for insurance providers in claims management and communications. Nevertheless, healthcare's reliance on normative judgments suggests that the benefits of AI may exhibit diminishing marginal returns over time.
However, the proliferation of AI and its increasingly accessible services are poised to democratize access, particularly benefiting small-to-mid-size pharmaceutical companies that provide more opportunities for M&A activity. Conversely, large pharmaceutical firms may seek to consolidate their market position by leveraging substantial investments in AI, capital expenditures that would have otherwise been used for inorganic growth. Despite these complexities, the trajectory of LLMs, generative AI, and data analytics points towards prevalence beyond 2024, likely underpinning increased transactional activity and broader economic growth.
Comments